Why smart money is leaving mutual funds: Sundaram CEO

The monthly average for inflow in equity mutual funds stood at 2015 Rs 7550 crore, where for the first seven months of 2016 it stands at Rs 2293 crore.

Net inflows into equity mutual funds have been slowing following a jump they witnessed in the year 2014 and 2015.

The monthly average for inflows into equity mutual funds stood at Rs 7,550 crore in 2015 while for the first seven months of 2016, it stands at Rs 2,293 crore.

In an interview with CNBC-TV18, Sunil Subramaniam, CEO of Sundaram Asset Management Company, put this trend down to high-net worth individual (HNIs) -- the so-called 'smart money' -- who had invested following the NDA victory and booking profits now, as the one-year tax lock-in expires.

"It (strategic inflow) over the last two years has shifted into a systematic investment plan (SIP) mode. Even this year month on month every month SIP flows have been rising from the previous month," he said.

On the earnings scenario, he said that the Brexit impact is visible on the IT and pharma companies, apart from which, earnings have not been very disappointing this quarter.

A: I just like to decompose the numbers in terms of what I would call as strategic allocation and tactical allocation. The strategic allocation is what happens from the retail counters. It is long-term money three to five years, looking for wealth creation and which over the last two years has shifted into a systematic investment plan (SIP) mode. Even this year month on month every month SIP flows have been rising from the previous month. So, that is steady, that continues and that is growing. So, the strategic allocation is growing.

Now on the tactical allocation, this is smart money, which high net worth individual (HNI) and the institutions do which basically tracks the valuations and moves across asset classes and within the cap spectrum within the mutual fund (MF) space. You mentioned that last year middle was the high point. So, why these tactical allocation generally have a one year time frame because of the 12 month tax free equity.

So, if you should track 12 month over last 12 month you will be able to see that redemptions generally happen from the 13 to the 15 month because now that they are in a tax free status people look is it wise to continue into equities versus fixed income or within equities largecaps versus midcap versus sectoral allocation.

Prashant: Let us just look at the average. 2015 each month mutual funds, equity schemes took in Rs 7,550 crore. I am including everything here, equity-linked savings schemes (ELSS) as well, not balanced funds, some portion of balance is difficult to judge but Rs 7,550 has become Rs 2,200 to 2,300 crore or so.

A: Because we look at the previous year what happened then was a big tactical shift from fixed income into equities. That money is in equities and if you see redemptions over last month or this month have come down sharply. So, that money is lying in equities. Now fresh money from the fixed income or savings basket into equities is what has slowed down.

However, the huge money came in last year because that is when the Modi government came in, so it is unreasonable to expect a Rs 7,000 crore average to continue forever. There was a big shift which happened that is what reflected last year. What we are seeing now is probably close to what you would expect as a normal run into the equity markets.

Ekta: Since that is the topic right now earnings disappointment, Motherson Sumi, we have seen it with Lupin, we have seen it with Dr Reddy's Laboratories, we have seen it with multiple companies this time around. Your sense in terms of how earnings have panned out?

A: We think that the Brexit impact on the IT and the pharmaceutical space is probably having an impact. Apart from that we are not too disappointed because we think both banks, which last year hurt the thing should be on the mend and should be rising.

Second thing is that the commodity price those which are sensitive to commodity prices like auto their share of cost from commodities is higher will show better numbers as the quarters come through because the full year impact will get seen.

The third thing is bank transmission of interest rates which is going to happen with the new marginal cost of funds based lending rate (MCLR) formula kicking in through during the year. If you recollect of 150 basis points by the Raghuram Rajan cut only 60 or 70 passed on by the banking system so, the balance of that should flow through over the next part of the year.

So, what we think is that broader commodity in terms of stocks those which are high interest cost, highly leveraged stocks should do well purely on based effect basis. So, not to really worry on that earnings. Specific disappointments on stock specific ones plus the Brexit you can’t deny that the Brexit is going to accentuate the European and the British slowdown. That is a fact that we have to take for granted. There is going to be adjustment period and how companies react to that and do that is going to be a wait and watch.